08/06/2011 07:07 pm ET | Updated Oct 06, 2011

U.S. Credit Downgrade's Direct Effect Could Be Negligible, History Suggests

WASHINGTON -- The downgrade of the U.S.'s AAA credit rating by Standard & Poor's on Friday may end up having little to no effect on interest rates for U.S. securities, according to analysts who have examined past credit rating downgrades in other countries.

When S&P did the exact same thing to Japan in 2000, demand for Japanese bonds actually increased in the following months, analysts note, because the market still saw Japan as safe for investment relative to the rest of the world.

The history of downgrades in Japan, Canada and other countries suggests the U.S. market could well shrug off the downgrade, rather than consider it an indicator of any real change in the status of U.S. bonds as the ultimate safe investment.

"The U.S., downgrade or no downgrade, is still going to be the benchmark," Rick Rieder, the chief investment officer at New York-based BlackRock Inc., told Bloomberg earlier this week. "Even with a downgrade, I think the market would assume the safest asset you could buy in a portfolio was still Treasuries."

A muted market reaction to the downgrade would be "consistent with the market’s reaction so far to saber rattling by rating agencies," analysts for AllianceBernstein Global Wealth Management wrote in June. "The US dollar's special place as the world's reserve currency reinforces this perception."

It seems the more alarming the rhetoric gets, the more investors flock to Treasury bonds, rather than flee them. Yields on two-year Treasury notes were near an all-time low Friday, at 0.28 percent, while 10-year bond rates were at 2.58 percent.

There are other factors at work, as well. A Reuters story last week suggested that a downgrade would have minor effects simply because it "pales in significance with evidence of flagging economic growth."

Other analysts, such as Forbes' Tim Worstall, have predicted a muted response because "the move in the rating is simply confirming what the market already believes."

The Wall Street Journal reported last week that not only Japan, but also Canada and Australia and a few other countries have seen their sterling credit ratings downgraded, but "by and large, borrowing costs remained fairly steady and, in some instances, eventually declined."

The effect of even small interest rate increases on federal debt would be magnified, however, as they would lead to automatic increases in other lending rates, such as for mortgages, student loans and corporate debt.